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Fear vs Rationality: Becoming a better investor (Part 2)


So you have made a firm commitment to become a better investor and to not be ruled by FOMO, greed and fear anymore (see previous post)? Excellent. As such, what can you do, as an investor, to move toward maximum rationality? Here’s a list of the most important rules to become a better investor:

1. Do not constantly watch your portfolio Next time you notice the price of an ETF or Index Fund you own moving up or down, think about the factors that may be influencing that move. Stocks are owned by people who have very different time horizons. You have mutual funds and hedge funds whose clients mostly have the patience of a four-year-old. They are getting in and out of stocks based solely on what they expect in the near-term future of an upcoming month or perhaps the next quarter – a rounding error of a time period in the life of a company that lasts decades. Some buyers and sellers are not even humans but computer algorithms that are reacting to variables that have little or nothing to do with fundamentals of the stocks your ETF invested in – these algorithms have a time horizon of milliseconds.You can clearly see this shortsightedness in action by reading quarterly outlooks issued by active fund managers, tantamount to reading tea leaves in trying to predict short-term market movements (for the futility of market prediction and market timing, see https://www.marcikelsconsulting.com/single-post/2017/04/12/Is-Your-and-Your-Advisers-Crystal-Ball-Consistently-Foggy)​

2. Remember: You’re an owner If you are a fundamental investor following an evidence-based investment approach, you are not just buying stocks, you are buying fractional ownership in businesses. And as a corollary of this approach, you make a firm commitment to invest in productive companies, the engines that propel capitalism forward. This is certainly a much better attitude than trying to predict individual stocks or future market movement, which is to say speculating.

3. Turn off the TV and cancel your stock brokerage subscriptions

Stock market movements throughout the day are completely random. The same actors that are influencing the up-and-down ticks of individual stocks–actors whose goals and time horizons have virtually nothing in common with yours–are driving short term market movements, as do unexpected political developments. I have sympathy for TV producers who must provide a continuous narrative to explain this randomness on a daily basis.

Financial TV shows also reprogram you to think about the stock market as a game. In encouraging you to play that game Financial TV shows are the catalyst why your time horizon might inadvertently dwindle from years to minutes or days, while your attention gets sucked into the daily TV narrative.

4. Most importantly: Get yourself familiar with academic insights into portfolio structures

Regular readers of our blog will have drunk the “academic cool aid” and will understand what it means to invest in an academically-clean, evidence-based manner. It turns out that Nobel Laureates have a lot to say on the topic of how to build low-cost index fund portfolios while controlling investor risk. I highly advise you reread the following 4-part series on our blog which presents the academic body of work underlying evidence-based investing: a) https://www.marcikelsconsulting.com/single-post/2017/05/29/It-is-best-to-be-a-Random-Walker b) https://www.marcikelsconsulting.com/single-post/2017/06/05/Scientific-investing-II-%E2%80%93-The-smart-academic-egg-heads c) https://www.marcikelsconsulting.com/single-post/2017/06/12/Scientific-Investing-III-Peanut-Butter-Spread-or-Term-and-Credit-Spread d) https://www.marcikelsconsulting.com/single-post/2017/09/06/Scientific-Investing-IV-Putting-it-all-together

Once you equip yourself with this evidence-based knowledge, you will be in a position to ignore the daily market noise. This knowledge will stop you from reacting in an emotional manner to short-term market gyrations and will prevent FOMO from entering your financial decision making. Staying the course and having a solid investment philosophy are the key to long-term investor success after all.

#FOMO #emotionfreeinvesting #evidencebasedinvesting #emotionalbias #fear #cognitivebias

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